Germany, the Eurozone and US' slowdown

money.jpgWell dear reader you might have seen something like this before but still I believe that it is important to point it out as an example of why the Eurozone might be in for bit harsher time than many seem claim. My main argument is summarized here. It all has to do with some underlying fundamentals which despite good signals from the Eurozone economies have not changed.

First of all we have the recent slowing of the US economy and although we believe in Roubini's recession calls or not he is right in arguing that the rest of the world cannot decouple from a US slump. From my side of the pond (Europe that is:)) this argument obviously hinges on the point about whether Japan and Europe are ready to take up the torch from a slowing US economy in driving global economic growth forward along side the (for now) solid performers of China and India. Roubini does not believe in this and frankly I think he is right.

The decoupling argument goes as follows:

(Nouriel Roubini)

'The argument is that there is enough domestic demand momentum in the four leading Asian economies (China, India, Japan and Korea) and there is now such a resilient recovery of growth in the Eurozone, starting with Germany that the rest of the world can happily weather the U.S. recessionary tsunami.  In JP Morgan's terminology, this "decoupling" is termed as the "rotation in global growth" from U.S. to Asia and the Eurozone. Others refer to it as the "locomotive" switch with a switch in the growth locomotive from the sputtering U.S. one to the perky ones in EU and Asia.'

Here at Alpha.Sources I have argued several times that domestic demand in Japan and Europe is not yet strong enough to make this idea of decoupling viable. So all in all I agree that a slowing US economy will negatively affect European's growth rates. That my argument is derived from a different perspective than Mr. Roubini's is another story and I agree nonetheless.

Secondly there are the underlying principles on which the Eurozone rests which simply do not permit the Eurozone to get off the mark. This is a three tier argument ... first off we have tough inflation targeting central bank who is already steadily raising rates arguing that monetary policy at this juncture already is too expansory. Secondly we have tough fiscal demands of convergence which are to be met; on that note Italy's and France's public finances are in shambles and Germany is caught between a rock and a hard spot. Let us be objective then for a moment and assume that the ECBs rate hikes are necessary in order to establish credibility with the markets and the fiscal demands actually will serve the big euro-countries some good it simply does not change the fundamentals. Europe has issues of its own which does not allow the continent to take over US' role in the global economy. As the last third tier of the argument I would like to invoke the diversity of the eurozone and how the idea of one single interest rate policy simply does not work ... once again the theoretical idea of convergence through fiscal contraction levying deflationary pressures on the economies could allow the grand scheme to work at some point but I think Spain and Italy might very well be lost in the process not to speak of the new Eastern Euro-countries and also we need to consider that this process will take some time. 

Let us return to reality for a moment and at least rejoice in the fact that the German construction sector is heating up ...

'Germany’s construction sector has emerged from a decade-long slump and no longer acts as a brake on economic growth in Europe’s largest economy, according to economists and companies in the sector.

Although hardly a boom, the bottom of the market has been reached, says Hans-Peter Keitel, chief executive of Hochtief, the country’s largest builder. “After almost 10 years of continual recession in the construction sector it is a highly important development: the market is moving upwards, even if it is in small steps . . .  If this development can continue, then construction can resume its traditional role as the motor of the German economy.”'

But then we get a stinker like this ... 

'German investor confidence has plunged this month to its lowest level for five years, suggesting that the recent strength of Europe’s largest economy might soon wane.

The Mannheim-based ZEW economic institute said that the unexpectedly steep decline in its economic sentiment index, by 20.7 points to minus 5.6 points in August, signalled “a considerable economic downturn within the next six months”.

The index has now fallen for seven consecutive months and was last lower in June 2001.


The ZEW figures added to fears that Germany will see a significant economic slowdown next year. “Dark clouds will appear on the horizon,” said Wolfgang Franz, the institute’s president.

If confirmed by other data, such as the Munich-based Ifo business climate index released on Thursday, the latest fall may call into question further interest rate increases planned by the European Central Bank.'

In the end I think this is important to think about because it permits us to see why the Eurozone cannot just from one year to another take over from the US in steering forward global economic growth and also why the contiuining optimists' argument concerning the eurozone must be taken with a pinch of salt